Excerpt from Peter Schiff’s article seen in the WSJ:
How has the market found the strength to stop its descent? No one is making the case that fundamentals have improved. Instead, there is widespread agreement that government intervention stopped the free fall. The home buyer’s tax credit, record low interest rates, government mortgage-assistance programs, and the increased presence of Fannie Mae, Freddie Mac and the Federal Housing Administration in the mortgage-buying business have, for now, put something of a floor under house prices. Without these artificial props, prices would have likely continued to fall.
Where would prices go if these props were removed? Given the current conditions in the real-estate market, with bloated inventories, 9.8% unemployment, a dysfunctional mortgage industry and shattered illusions of real-estate riches, does it makes sense that prices should simply fall back to the trend line? I would argue that they should overshoot on the downside.
With a bleak economic prospect stretching far out into the future, I feel that a 10% dip below the 100-year trend line is a reasonable expectation within the next five years, particularly if mortgage rates rise to more typical levels of 6%. That would put the index at 114.02, or prices 28.3% below where we are now. Even a 5% dip would put us at 120.36, or 24.32% below current prices. If rates stay low, price dips may be less severe, but inflation will be higher.
From my perspective, homes are still overvalued not just because of these long-term price trends, but from a sober analysis of the current economy. The country is overly indebted, savings-depleted and underemployed. Without government guarantees no private lenders would be active in the mortgage market, and without ridiculously low interest rates from the Federal Reserve any available credit would cost home buyers much more. These are not conditions that inspire confidence for a recovery in prices.
In trying to maintain artificial prices, government policies are keeping new buyers from entering the market, exposing taxpayers to untold trillions in liabilities and delaying a real recovery. We should recognize this reality and not pin our hopes on a return to price normalcy that never was that normal to begin with.
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Robert Shiller got in on the action too:
I think Schiff is a realist, not all doom and gloom. On a national level, maybe not North SD specific, he’s probably correct.
Remember when CNBC was laughing at him in ’06 when he discussed the bubble and predicted the housing crash?
Schiff was right about the housing bubble, and I remember watching him get laughed at in 2006. But he was wrong about the strength of the euro, and foreign equities which got pummeled.
Everyone is going to be right about inflation, sooner or later, but he was way too early and too bearish on the dollar. We still have deflation, and flirting with bi-flation. Inflation is still a couple years off, IMHO.
Schiff’s article was good, but I think there is a real problem relying on the long term appreciation trend to forecast regression to its mean without referring to other metrics that indicate reasons for pause. Maybe inflation is coming, maybe it isn’t (ala Japan’s long term deflation). Clearly the market is confused or hedging between these two possibilities in many places. In some markets prices are very clearly too high–the trend of appreciation, the price/rent and price/income ratios all point in a negative direction. Price drops are going to remedy that problem over time in some places–the markets just won’t clear the backlog of houses without overshooting. But in other markets, the pricing is way off the mean in terms of long term appreciation over inflation, and yet they seem about “fair” in terms of price/income and price/comparable rent ratios. The comparable rentals are likely to put some kind of floor under prices even if they’re off the long term trend in terms of annual price appreciation.
In the junk bond days house values went up and when the S&L’s blew up the RTC was formed to liquidate “assets”. So far the current housing bubble has acted much like what happened in the early 90’s. But this time because all the “junk” is intertwined through derivatives it will take a lot longer to hit the RTC stage.
Banks are also working together this time to rig the game in their favor via the federal reserve.
So far all the govt had done is use band aids to deal with the economic recovery.How hard is it to print money?
The fundamentals of the problems are not being addressed.There is 20% unemployment in CA.Most americans are financially illiterate.You need people to feel some pain or the same mistakes will happen in the future.I think the global economy is catching up with us.
I would draw that blue trend a little differently but time will tell.
lgs above has it right with the rents as a factor.
In some places Schiff seems confident that leaving the market to its own devices would have given a better result than the interventions he describes. I’m not so sure.
An interesting point regarding the bulls and bears. Both think gov/intervention will shape the market.
More intervention = prices stay the same or go up
Less intervention = prices stay the same or lower
Hard to account for the amount of gov/fed intervention in an economic model.
http://dallasfed.org/research/eclett/2010/el1014.html
Notice the first chart. And that’s the good news. We still haven’t to started the process of municipal and state defaults, which are inevitable.